How compound interest works
Interest is added to your balance, and next month you earn interest on that interest too. Over long periods this snowball effect can make up most of your final balance.
P is the starting amount, PMT is the monthly contribution, r is the monthly rate, and n is the number of months. If interest compounds daily, quarterly, or yearly, the calculator converts it to an equivalent monthly rate. $10,000 plus $500 a month at 7% for 20 years grows to about $300,850, and about $170,850 of that is interest.
The Rule of 72
Divide 72 by your annual return to estimate how many years it takes money to double. At 6%, that's about 12 years; at 9%, about 8 years.
Frequently asked questions
What return should I use?
Savings accounts and CDs pay a stated rate. For stock investments, many people test a range such as 5% to 8% to see a cautious and an optimistic case. Past returns don't guarantee future results.
Does this account for taxes or inflation?
No. Taxes depend on the account type, and inflation reduces what the balance can buy. Subtract an inflation rate from the return to see results in today's dollars.